NAFTA'S LESSONS: FROM ECONOMIC MYTHOLOGY TO CURRENT REALITIES(1).(North American Free Trade Agreement)(Statistical Data Included)

Introduction

The selling of the North American Free Trade Agreement (NAFTA) between the United States and Mexico constituted one of the largest and most sustained bipartisan efforts on the part of the U.S. government, the largest U.S. corporations, and the U.S. economics profession in living memory. The Mexican government also brought its impressive public relations skills to the political process with a single-minded intensity that surprised many long-time observers of Mexican political affairs.(2) The myths surrounding the effects of NAFTA were many and varied--all under the rubric of "win-win-win" for the United States, Canada, and Mexico.

The momentum to pass NAFTA was propelled by four primary myths: (1) NAFTA would be a trade agreement not a project to shift production to Mexico. (2) The impact of NAFTA would be felt only after passage: NAFTA was led by a binational search for efficiency. It was not a government/corporate-led strategy to regain lost United States economic dominance which arose in the 1980s. (3) NAFTA would reduce consumer prices in the United States. (4) NAFTA would quickly create 170,000-200,000 jobs in the United States (Hufbauer and Schott, 1993). Jobs would be created in all nations as a result of balanced trade. This article is primarily concerned with this fourth myth regarding employment effects. However, to introduce the argument presented here in a broader context, in this section the first three myths are briefly discussed.

The policy process which culminated in NAFTA was under way by 1986 with the private-sector-funded study by "the Bilateral Commission on the Future of United States-Mexican Relations" favoring further consolidation of the growing economic ties between the United States and Mexico. By November 1987 President Reagan had signed a "Bilateral Framework Agreement on Trade and Investment" with Mexico (Erb and Greenwald, 1989: 135). Mexico then responded with a new foreign investment law in 1989 which greatly increased the scope and latitude of foreign investors (Lustig, 1992: 158-160). (In the 1980s Mexico's tariffs were not a major concern of U.S. corporate capital, but the Mexican foreign investment laws certainly were of central concern to many prospective investors.) In March 1990 Mexican President Salinas announced his support for a "Free Trade Agreement" with the United States. Now the word "investment" had been purged from the title, even though the elimination of all barriers to the free movement of U.S. corporate capital into (and out of) Mexico was and is at the core of NAFTA. Thus, the first myth of NAFTA is that the agreement exists to facilitate free trade.

In the late 1980s and early 1990s the U.S. auto and autoparts industry proceeded to make a heavy investment commitment in Mexico, confidently premised on passage of NAFTA (Ramirez de la O, 1998: 59-63; Mortimore, 2000: 1617). This illustrates the second myth of NAFTA-that the final passage of the agreement at the end of 1993 constitutes the starting point for an analysis of NAFTA. While it is impossible to set a precise "start" date, the impact on Mexico of the NAFTA project was overwhelmingly large years before final passage.

A third myth of NAFTA is that U.S. "consumers" are the beneficiaries of enhanced trade (and investment) with Mexico. Consider that roughly 85 percent of all imports from Mexico are manufactured goods and that roughly 25 percent of these goods are auto-related products. In the U.S. direct labor cost (as a share of total cost) in auto production range from 20 to 30 percent, while in Mexico direct labor cost drops to roughly 5 percent (Dicken, 1998; Juarez Nunez, 1999: 177-178). Seeking this cost advantage, in 1994 General Motors moved 50 percent of its GM "Suburban" production to Mexico, cutting wages from $19 per hour to $1.54. In 1994, before Mexican output came on line, the Suburbans sold for $21,000-$24,500 each. By 1996, with Mexico generating one-half the output, their average price had risen by 20 percent--while the general auto price index (for all vehicles sold in the United States) increased by only 5.4 percent (Anderson, Cavanagh, and Lee, 1999:51).(3) Naive economists often predict great "efficiency," and thus consumer benefits, from "free" trade. But the auto industry--and many other industries--does not function as a purely competitive industry. As an oligopoly industry of few sellers, it will not pass its cost savings on to "consumers." This, of course, is exactly why large corporations put so much effort into the creation of NAFTA.

This article will focus on the fourth and primary myth of NAFTA --the employment effects: Proponents asserted that the agreement would facilitate a structural shift in both nations toward greater efficiency, expanding trade, thereby creating employment in both nations. A linked effect would be a tightening in the labor markets of both nations and therefore a mutual increase in wages.